Place-Based Redistribution

We study optimal income taxation in a spatial equilibrium model with heterogeneous locational preferences, labor supply decisions, and competitive housing and labor markets.

We study optimal income taxation in a spatial equilibrium model with heterogeneous locational preferences, labor supply decisions, and competitive housing and labor markets. Expressions characterizing the optimal tax schedule in each community are provided that capture the fiscal externalities associated with migration and the effects of redistribution between households and landlords. Correlation between skill and locational preferences yields optimal transfers to poor areas, while sorting based on comparative advantage can motivate transfers in either direction. A calibration to areas targeted by the US Empowerment Zone program yields sizable optimal spatial transfers that are sensitive to assumed levels of migration responsiveness. (JEL H21, H23, H24, J24, J31, R23)